Alternative Practice Structures: Opportunity and Responsibility

Marty Green, Esq. Senior VP and Legislative Counsel, Illinois CPA Society
The Latest on Advocacy and Legislation

The emergence of private equity (PE) investment and influence in certified public accounting (CPA) firms is becoming more common—and for obvious reasons. For starters, PE investment provides needed liquidity for CPA firms to evolve, grow, and acquire advanced technology. In exchange for their capital infusions, CPA firms provide stable revenue streams to their PE backers, adding greater value to their holdings.

Of course, with PE’s growing presence in the profession, state and federal regulatory agencies must continue to evaluate these types of alternative practice structures to ensure compliance with current accounting practice standards and guidelines.

It’s important to remember that there are legal and professional responsibility requirements that CPAs and their firms need to consider when contemplating alternative practice structures.

UNDERSTANDING FIRM OWNERSHIP

Let’s first look to the Illinois Public Accounting Act for guidance on firm ownership. According to the act, 51% of a CPA firm’s owners must be CPAs who, regardless of licensure, must be active participants in the firm or affiliated entities and must comply with the act’s rules (225 ILCS 450/14.4).

The act’s administrative code also explains who qualifies as a member of the firm and defines majority ownership of the firm in terms of financial interest and voting rights of all partners, officers, shareholders, or members (68 IAC 1420.30). The administrative code also outlines unprofessional conduct as engaging in any business or occupation that impairs the objectivity of a licensee’s judgment in connection with the rendering of professional services (68 IAC 1420.200). This section of the code also references the AICPA Code of Professional Conduct, which means that any violation related to professional conduct can result in discipline by both the profession and the Illinois Department of Financial and Professional Regulation.

Additionally, the AICPA Code of Professional Conduct addresses the independence rule for CPAs in public practice, which requires CPAs to maintain independence when providing professional services—meaning, they must remain objective, unbiased, and free from conflicts of interest (ET §1.200). Notably, the code also recognizes alternative practice structures and includes guidance for determining whether CPAs are compliant with the independence rule (ET §1.220.020).

Other key legal and regulatory requirements to consider include:

• Only licensed firms can perform attest services.
• CPA firms must be (at least) majority owned by individual licensees and non-licensed owners must be actively engaged.
• CPAs must remain responsible for attest services.
• CPA firms must have clarity on which entity is providing services.
• Independence rules extend to the non-attest entity and potentially others.

PRESERVING INDEPENDENCE

The professional standards highlighted above provide guardrails to ensure independence in the attest services space. Generally, with the combination of an attest firm and a non-attest entity, the non-attest entity and the entities it controls should be independent of financial statement audit and review clients of the attest firm.

For instance, if a CPA firm that provides attest services is closely aligned with another public or private organization that provides professional services, the two entities usually have an administrative service agreement where the non-attest entity provides administrative services to the attest entity (i.e., the CPA firm). In this model, the CPA firm pays for the administrative services and remains responsible for all attest services and decisions.

However, with alternative practice structures forming through various means of mergers and acquisitions and investments, maintaining attest entity independence is becoming increasingly complicated. And in addition to preserving attest entity independence, there are significant downstream issues related to a PE firm’s clients interacting with the attest firm (ET §1.220.010).

With all this in mind, alternative practice structures typically exhibit the following attributes:

• The CPA firm and non-attest entity are legally separate entities with separate governance.
• All employees become employees of the non-attest entity.
• The CPA firm retains complete control over attest work, including acceptance of engagements, continuance decisions, and individuals working on attest engagements.
• The non-attest entity is part of independence monitoring. Others may potentially be included as well.
• Separate entity disclosures and disclaimers, in addition to marketing, engagement letters, and billing, are adopted.

ADDITIONAL GUIDANCE

Although alternative practice structures aren’t new, their ongoing evolution requires regulators and organizations to continuously evaluate their impact on accounting standards and rules. That said, only a few resources are available on the topic now. One resource I’ve found useful is the AICPA Professional Ethics Division’s March 2025 discussion memorandum, “Potential Revisions to the AICPA Code of Professional Conduct and Guidance Related to Independence in Alternative Practice Structures.” This is a good starting point for anyone needing more guidance on PE and alternative practice structures.

While PE presents opportunities for CPA firms, there are inherent risks if split-entity structure arrangements aren’t properly formed. As a profession, it’s paramount that we exercise due care with these alternative practice structures. If we’re not careful, compromising independence could erode the profession’s reputation and result in additional regulatory tensions.

Related Content:

• Best Practices in Post-Merger Integration: Two seasoned public accounting firm leaders share their tips for finding success when combining firms.
• Merger Guidance for CPA Firms: Start Early, Plan Strategically for Long-Term Success: The papers are signed, and your merger is officially closed—but what comes next? Experts share their guidance for achieving post-merger success.